What Is Increasing Returns to Scale?

by Corr S. Pondent; Updated September 26, 2017

Increasing returns to scale is a concept in economics. It looks at the relationship between the input used to produce goods and the output that results from using that input.

Input

An entrepreneur uses various factors of production to produce goods. They include land, labor, capital equipment and financing, and her own organizational skills.

Output

By using the input, the entrepreneur produces goods. In the case of a car manufacturer, for example, the output is the number of cars produced.

Increasing Returns

The entrepreneur experiences increasing returns to scale if hiring more employees and increasing other input used in production results in a higher level of output than before.

Not Necessarily Proportional

The entrepreneur cannot be certain that if the factors of production are doubled the output will double too. The output may not rise in direct proportion to the additional input used.

Diseconomies of Scale

And at some point, it is likely that increasing the factors of production will not have any positive effect on the output. If an entrepreneur is managing a factory by himself, he may get to the point where he cannot efficiently manage any more production. By going beyond this point, he may even see output fall off.

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